A very short History of Economics – Before the 20th Century

Currency was invented to eliminate the limiting effect of bartering. Thus medium and large scale societies were able to come into existence. Currency made trade much more convenient and allowed societies to interact on much larger scales than previously. For millennia trade was controlled primarily by societal rulers. Eventually merchants were allowed to pursue trade on their own and simply pay taxes to the government. Trade, production, and consumption became the basis for current economic models.

A very short History of Economics – Since the 20th Century (more or less)

The history of Economics gets very interesting in this era with lots of experimentation, successes, and failures. The last 100 years has been dominated by Capitalism, Socialism, and Communism. The big differences between these economic models is the entity that controls the economy and the limit or extent of personal freedom allowed.

Communism

Karl Marx and Friedrich Engels collaborated to write “The Communist Manifesto” which lays out their case for government controlled economies and a government controlled by the working class. They also penned other influential works on economics, production, and society both collaboratively and independently. Their work and those of others inspired Vladimir Lenin to lead the Russian Bolshevik Revolution. Their work also inspired other communist movements in Europe, Asia, Africa, and the Americas.

Communist societies rely on the government to own and control the means of production, distribution, and trade. The workers give up the freedom of making many of their own life choices for the promised economic stability and protection of the government. In theory all members of communist societies are supposed to be equals. In practice the Russian peasants were surprised to find that the Communist leaders behaved a lot like the Czars they overthrew. Communist leaders insulated themselves from the workers by enjoying the benefits of special shopping areas, special roads, special airports, and special housing for their personal use. The privilege of rank manifests itself in all Communist governments.

The largest number of famine related deaths have occurred in Communist societies. The largest number of politically motivated deaths have also occurred under Communist governments. All told, Communist governments have been responsible for over 100 million deaths in the last 100 years.

The economic collapse of the Soviet Union was a stunning development but did not lead to the collapse of Communist governments everywhere. China (mainland) is still the largest Communist government. Other current Communist countries are North Korea, Viet Nam, Cuba, and Laos. Notable among these 4 countries is the abundance of crushing poverty. China will receive more discussion in the Capitalism section.

Socialism

Socialism has its roots in the French Revolution and is based on the egalitarian principle of equality for everyone. The masses looked to improve their lot in life and to bring the rulers and elite down to the same level. Equal outcomes is the goal of Socialist policies.

Communism and Socialism share common roots and principles but differ in the methods for achieving them. Whereas Communism has the worker nominally owning all means of production and sharing the outputs, Socialism has the government owning or controlling the means of production. Socialist governments control the means of production through full or partial ownership stakes, regulation of industry and commerce, limiting internal competition, limiting external competition by protectionist means (tariffs, exclusionary laws, etc.), and preferential treatment of favored industries and enterprises. Socialist countries exert significant control over the freedoms allowed members of their societies but to a lesser extent than Communism. Socialist control is indirect whereas Communist control is direct.

Fascism and Nazism are offshoots of Socialism. Benito Mussolini was a dedicated socialist prior to founding Fascism which was a form of socialism with Italian nationalist workers rather than the broader international worker favored by Socialism at the time. Mussolini’s Fascist government controlled large segments of the economy and sought territorial expansion through North African conquests prior to WWII and of course during WWII as an ally of Nazi Germany. Nazi is a shortening of the term National Socialist. Adolf Hitler pursued government control in Germany just as Mussolini had in Italy. Racism and unbridled territorial ambitions also fueled Hitler’s ambitions. Many of Hitler’s critics have labeled Nazism and Fascism as right wing or conservative ideologies but in truth they follow the Socialist ideology of government control of production and society.

Socialist economies tend to be fairly stagnant since outstanding achievement and innovation do not result in significant financial rewards for those who develop them. In most cases equality is achieved by limiting or holding back the production of motivated individuals or companies. Workers rely on the government for their welfare and their focus tends to be on their benefits and security rather than on their production. Modern examples of governments that run their economies with Socialist theories and practices are France, Venezuela, and Sweden.

Capitalism

The father of modern Capitalism is Adam Smith who published “Wealth of Nations” in 1776. In this five volume set Smith laid the foundation for open and competitive economies based on the notion that for every good and service desired someone will provide the labor and capital to fill those niches. Perhaps Smith’s most famous quote is, “It is not for the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest”. Smith argued that economies left to their own devices and with little government interference will succeed because their workings are directed by “an invisible hand”. This invisible hand is the complex interaction between the producers of goods and services, consumers, supply and demand, regulation, private property, creation of wealth, expectations, and other additional factors.

Contrary to popular opinion, Smith did not advocate for government to be watching from the sidelines. He argued that government was essential to well functioning capitalism as they were the only entity capable of enforcing contracts, ensuring competition, issuing patents, and protecting property rights. In Capitalist economies the government’s role is to be a neutral observer and fair enforcer of individual rights. The means of production, the supply of capital, and property are held privately.

Capitalist economies are the most robust, the wealthiest, and have the largest number of people enjoying a high standard of living. Communist and Socialist economies have wealthy individuals also however their wealth is gained through being among those “favored” by the government. Capitalism has wealthy people also but most of them have earned it by being outstanding producers. See the section on Income for additional information on the earning of wealth. Capitalist economies positively influence innovation and entrepreneurs. More breakthroughs come about in economies where new ideas, products, and services are encouraged and rewarded. Controlled economies generate far fewer breakthroughs since dynamism is discouraged and the status quo is protected by the government. If a government controls or protects the horse industry the incredible benefits of the automobile are far less likely to have the same impact as a government that allows fair competition so that the auto industry could supplant the horse industry.

Examples of Capitalist economies are America, Japan, and Hong Kong. Capitalism has gained in popularity especially in countries previously in the Soviet Union and in Southeast Asia. India has significantly decreased poverty and increased the middle class by employing Capitalist philosophies. The same holds true for Malaysia and Singapore. The most intriguing case of Capitalist awakening is in Communist China. The inclusion of Capitalism in the Chinese economy has reduced the level of poverty in China dramatically in a relatively short period of time. Quite literally, millions have been lifted out of poverty in China. Capitalism has succeeded in reducing poverty where Communism had failed. The interesting thing to watch will be how China’s population reacts to government control of their personal lives when they have experienced significant freedom in their financial lives. Countries on the economic decline are those countries whose government has taken more active roles in their economies. Many countries in Africa and South America are poverty stricken even when their countries have abundant natural resources to exploit and their governments confiscate the wealth and property of out-of-country individuals and corporations. Simply taking wealth does not eliminate poverty and hardship. The Capitalist desire to increase wealth by putting it at risk in order to increase it is the engine that reduces poverty and hardship.